Application of the “Own Use” Exemption (IFRS 9)

Date recorded:


The IFRS IC received a submission about the possibility of applying the own use exception in IFRS 9:2.4 to contracts for the procurement of renewable energy (power purchase agreements or “PPAs”) as part of an entity’s commitment to reduce the effects of climate change and to decarbonise their production and products for each of the three fact patterns. The three fact patterns include purchased-as-produced contracts, settlement of power purchase agreements and oversized contracts. The description is as follows:

Fact Pattern 1—Purchased-as-produced contracts: The entity enters into a PPA with a wind park operator to acquire a fixed share of the energy produced at a price per unit of energy that is fixed throughout the contract duration of 25 years. The entity does not operate its production facilities all the time. Therefore, it is unavoidable that there would be times during the life of the contract during which the entity will be unable to consume the energy when delivered and has to sell the energy on the spot market. On the other hand, the entity repurchases (at least) the same amount from that market at times when the production facilities are operated. The process of selling and repurchasing is delegated to a service provider for a fixed or formula-based fee and is designed to be on autopilot that acts without the intention of trading to realise profits. There is no explicit net settlement option within the contract.

Fact Pattern 2—Settlement of PPAs: Based on the estimated gas demand, an entity has contracts to purchase natural gas for use in its own production facilities to fix the price and secure physical supply in advance. The entity has never settled any contracts net historically. Due to change in economical and geo-political environment, the entity invested in energy saving efforts and reduced its demand by 30%. Accordingly, the entity net settled all unneeded volumes by entering into a compensation agreement with the supplier. The entity continues to regard the primary purpose of the natural gas purchase agreements as contracts to buy a non-financial item.

Fact Pattern 3—Oversized contracts: The entity enters into a PPA that does not promise a fixed amount of output with providers of renewable energy (wind and solar). Based on information provided by the energy provider, the entity expects to receive 95% of its energy demand from the energy provider, which is based on the probability of 75% of the solar farm operating under most probable conditions. Any additional demand would be procured from the spot market. Similarly, any excess energy at the point of delivery would be sold to the spot market.

Staff analysis

The staff sent an information request to members of the International Forum of Accounting Standard-Setters (IFASS), securities regulators and large accounting firms. The majority of large accounting firms said that the fact patterns are either common in many jurisdictions or becoming increasingly common in some jurisdictions. Standard-setters from Europe and the Asia Pacific region observed all three fact patterns to be common in certain industries in their jurisdictions. All respondents said that accounting for these fact patterns have a material effect on the financial statements. Preparers, auditors and regulators in impacted jurisdictions said that IFRS 9 does not provide sufficient guidance on how to assess whether entities satisfy the requirements for own use and this has caused diversity in practice. Many respondents said that similar questions arise in the context of other energy and fuel markets such as oil and gas. Moreover, respondents noted similar questions arise with regard to the accounting for virtual PPAs (VPPAs). They commented that if the guidance of the IFRS IC only covers the fact patterns described, it would leave many unanswered questions regarding the application of the own use exception to other fact patterns.

The staff said that a key element of the IFRS IC’s analysis would be the ways in which electricity markets are structured. Therefore, the staff paper first provided the background information on electricity markets and introduced ‘gross pool’ and ‘net pool’ electricity markets, which are broadly the two major categories of the wholesale electricity market design. In a net pool market, the customer has contracted with a supplier to purchase a specified volume of electricity for a period of time. Therefore, the customer has both a contractual right to that volume of electricity and a contractual obligation to purchase it. In contrast, in a gross pool electricity market, a PPA provides the customer with neither the right to obtain electricity nor the obligation to purchase or consume any particular amount of electricity either from the PPA contract partner or the grid. Therefore, the key difference between a gross pool and a net pool electricity market is that in a gross pool electricity market the electricity contracted under a PPA is never considered to be physically delivered to the electricity customer. As a result, the fact pattern described in the submission can only be contracted where market operators run a net pool electricity regime, which is the focus of the staff’s analysis. 

Applying the requirements in IFRS 9:2.4 to the fact patterns described in the submission, the first factor is an assessment of the meaning of delivery of electricity. The staff state that delivery of electricity into the grid by the generator in a net pool electricity market constitutes ‘delivery’ because at the time the electricity is delivered into the grid, the electricity customer is able to instantaneously access that electricity; and the delivery of electricity by the generator to the user satisfies both the customer’s contractual right to that volume of electricity and its contractual obligation to purchase electricity at the fixed price.

Secondly, the meaning of settlement has to be assessed. The staff considered that the circumstances described in IFRS 9:2.6(b) might be relevant to Fact Pattern 2 and an entity needs to apply judgement to determine whether it has established a past practice of net settlement and whether contracts in a group of contracts are similar for the purpose of applying IFRS 9:2.6(b). For Fact Patterns 1 and 3, IFRS 9:2.6(c) might be relevant and the primary consideration is whether the selling activities are profit-orientated or are a result of the electricity market structure and would therefore not preclude the own use exception from being applied.

Thirdly, an evaluation of an entity’s expected electricity usage requirements is required. The structure of the electricity market is characterised by unique features (e.g. unpredictability of supply, inability to store electricity, automated sale of unused electricity within short time interval, etc.) that are absent in a typical commodity or consumption goods market and therefore it differs substantially from other commodity markets, where the assessment is relatively straight-forward. Some stakeholders considered that the selling excess electricity at spot prices within one or more delivery intervals means that some electricity is not consumed for own use at that particular delivery time and therefore the own use exception cannot be applied. However, some stakeholders considered that the entity uses the spot market as a storage mechanism and does not intend to generate profits from those transactions. In addition, some other stakeholders considered that as long as the entity takes delivery of the contracted amount of electricity, the entity’s expected usage must be assessed over a longer time interval or the term of the contract. The staff state that IFRS 9 allows some deviation of actual usage from the expectation and considered it consistent with the principles of the own use exception. However, the staff considered that there is no adequate application guidance in IFRS 9 to determine this.

In conclusion, the staff considered that the principles and requirements in IFRS 9 do not provide an adequate basis for an entity to determine the appropriate accounting for PPAs in the circumstances described in the submission. It would be necessary to add or change the requirements for the own use exception in IFRS 9 to clarify:

  • To what extent the market structure in which a non-financial item is transacted is relevant to determining an entity’s own usage requirements
  • Over which period an entity’s expected usage requirements needs to be evaluated when delivery could occur on a near-constant basis
  • To what extent transactions in the spot market subsequent to delivery indicate that a PPA is, or is not, for the purpose of an entity’s own usage requirements

Staff recommendation

The staff recommended that the IASB develop a narrow-scope amendment that addresses the application of IFRS 9:2.4 particularly to contracts for the purchase of a non-financial item that cannot be stored and must be consumed within in a short time interval in accordance with the market structure in which the item is traded.  

IFRS IC discussion

The IFRS IC had a lively discussion on this agenda item. Some of the IFRS IC members shared their view on the development of IFRS 9 for such “own use” exemption and some of them shared their knowledge about the gross versus net pool electricity market which indicate that some circumstances may be different from what has been set out in the agenda paper.

Some IFRS IC members commented that there is possibility that the PPAs under the gross pool market result in the customer having both a contractual right to that volume of electricity and a contractual obligation to purchase it, while some could be physically delivered. On the other hand, PPAs in a net pool market could be structured to have no such right and obligation and no physical delivery as well. Therefore, the focus should not be the market which the PPAs are entered into but whether the PPAs give the customer the right and obligation to purchase electricity. Some of them commented that, if the “own use” exemption is workable in the net pool market, those users in the gross pool market would be disadvantaged while the purpose of entering such PPAs is similar. A number of IFRS IC members suggested the volatility in the gross pool market might be addressed by applying hedge accounting, but such application would be complicated. A few IFRS IC members suggested the issue related to the gross pool market also needs to be addressed later after this project.

Some IFRS IC members disagreed that the principles and requirements in IFRS 9 do not provide an adequate basis for an entity to determine the appropriate accounting for PPAs in the circumstances described. Particularly, one IFRS IC member said Fact Patterns 1 and 3 obviously failed the criteria for the own use exemption. Instead, they considered that users do not like the conclusion as a result of the application of IFRS 9. The Chair responded that if this is the case, it should not result in a standard-setting project. It should be the unique characteristics of the renewable power that the existing Standard could not address, because when those relevant paragraphs in IFRS Accounting Standards were developed, the contracts it intended to address did not exhibit such features. The conclusion resulting from the application does therefore not faithfully represent the economics of the transactions that drive the IFRS IC to refer to the IASB to recommend a standard-setting project. Some IFRS IC members said that going back to the issue, an IFRIC agenda decision on the narrowed fact patterns could be an alternative. Nonetheless, some IFRS IC members had concerns with this because it may end up changing the practice on other scenarios. The staff replied that they did not mean that there is nothing in the Standard that could address the issue submitted but there is something (due to the unique features of the PPAs) that the existing Standards cannot address. Therefore, they considered that those unclear areas (as set out in the paper) should be clarified.

There was also discussion on the scope of the potential amendments to requirements in IFRS 9. Some IFRS IC members considered that it should be a narrower scope to include only renewable energy with the unique characteristic of not being able to be stored and uncontrollable production. However, a number of IFRS IC members considered that standard-setting should be principle-based so that it can cover a broader scope. They said there are other similar contracts which involve a tremendous volume of commodity which cannot be stored that encounter the same “own use” exemption issue and that should be addressed as well.

They also discussed the key features of the PPAs which the existing Standards do not address, other than the “storage” problem. This should include “immediate usage” once it is produced in scenarios where neither the generator nor the customer can control how much to be produced. Some IFRS IC members said that the long term (as long as 25 years in Fact Pattern 1) is another unique characteristic that made fair value of this kind of contract difficult to be assessed due to the volatility in the production. In addition, it is difficult to predict the future spot price. A few IFRS IC members said that the project setting should also focus on other aspects of contracts including the unit of account. They said that there is never a perfect match between the expected usage and the actual usage due to the unpredictability of the supply. The standard-setting should therefore cover in which time bucket to compare the usage and how to draw the line when analysing frequency and magnitude of selling the energy.

IFRS IC decision

9 out of 14 of the IFRS IC members agreed that the requirements in IFRS 9 do not provide an adequate basis for an entity to determine the appropriate accounting for PPAs submitted. The same number of IFRS IC members agreed recommending that the IASB develop a narrow-scope amendment that addresses the application of IFRS 9:2.4, in particular for contracts for the purchase of a non-financial item that cannot be stored and must be consumed within in a short time interval.

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